Cameron’s GPT in a good place

The unmasking of superannuation giant UniSuper as holding a near $300 million stake in
GPT Group
, through its lodgement of a substantial security holder notice, is a sure indication that the trust is on rock-solid footing.

The industry superannuation fund’s disclosure that it has lifted its interest in GPT to 5.64 per cent is a testament to the two years of hard work by the
Michael Cameron
-led team recapitalising and restabilising the trust.

About $1.7 billion was raised in the weeks after Cameron’s arrival in May 2009 and the group has since out-performed the property index as it hived off the European assets in its controversial international property joint venture with investment bank Babcock & Brown and refocused on Australian retail, office and industrial assets.

Watchers of the group also cite the overhaul of its board, the exit from the volatile hospitality sector and US retirement assets, and the overall capital discipline instilled across the group on the former banker’s watch.

This has even led to a pull-back from riskier local projects, with the site of a proposed $600 million development in Newcastle close to selling to mining entrepreneur Nathan Tinkler.

The group’s focus is instead on a well-flagged buyback which is being handled by investment banks Merrill Lynch and UBS.

GPT unveiled an on-market buyback for up to 5 per cent of its issued capital on the day of its annual general meeting last month, but no securities have been bought yet.

GPT management likes the concept of buying back its shares at a discount to their net tangible asset backing. But it is reluctant to push the button on purchases if it risks diluting earnings.

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JPMorgan’s Rob Stanton says GPT under its new leadership continues to prove it has a tight mandate focused on core Australian real estate. He says earnings are likely to show slow cyclical recovery and he tips growth in earnings per security and net tangible assets above inflation for the next several years.

Stanton raises the possibility that the buyback could be funded by non-core asset sales. The group completed the $300 million sale of Ayers Rock Resort this year and is likely to receive proceeds from selling the canned Newcastle project, excess units in its unlisted office fund and some development land. Stanton argues this approach would lift earnings per security in fiscal 2012 by up to 2.6 per cent.

Against this positive wrap, there is some negative institutional sentiment about, with Goldman Sachs analyst Simon Wheatley noting that on a trip to Europe “not one person voluntarily wanted to talk about" the stock.

To some observers, it would be best if GPT joined the ranks of A-REITs that have returned to the direct market to buy assets.

This could help the group close the gap at which it trades to its net tangible asset backing. Given the cost of debt and costs like stamp duty top 7 per cent, this all but rules out buying regional malls or premium office towers purely on balance sheet.

This leaves industrial property assets. GPT has long toyed with setting up a wholesale industrial fund. It would sit well alongside the group’s wholesale office and retail property offerings.

It does not want to use its own assets to seed the fund and spent time earlier this year looking at a number of portfolios.

Properties are available in the 8 per cent yield range enabling GPT to both own a stake in the fund accretively and also get a kicker from fees.

But the group has pulled back from this path in order to refocus on the buyback option.

One more radical option would be to make a takeover play for another listed vehicle trading at a discount.

But the rise of hedge fund activity means that many of these gaps – even sometime mooted target Dexus Property Group – have started to close.

To sceptics there’s not a lot of growth built into the group. Cameron, having stabilised the balance sheet, now faces the challenge of growing a lasting property business.